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Banks branch out to take on deforestation risks

Every year millions of hectares of tropical forests are cleared to make way for lucrative plantations of some of the world's most commonly used "soft" commodities: palm oil; soy; timber; and cattle.

The rampant destruction of some of the world's most important forests is not only ecologically destructive, but also a major contributor to climate change — deforestation and forest degradation together account for up to 15 percent of the world's annual greenhouse gas emissions according to CDP.

Companies are coming under increasing pressure to tackle the problem. Many fear the wrath of environmentally conscious consumers if they are found to be funding deforestation — the reputational risks of a sudden upsurge in consumer engagement have been abundantly demonstrated in the wake of the Blue Planet II and the ensuing outcry over plastics use.

More still are under pressure from stakeholders, from external investors to company board members, keen to iron out supply chain risks and keep pace with peers to deliver ambitious sustainability targets.

It's resulted in an uptick in sourcing policy overhauls — just last week U.S. fashion retailers Guess and Levi Strauss announced new sourcing and manufacturing processes to cut pollution and deforestation in their supply chains.

And there are signs the pressure is gradually moving up the financial chain of command as well. In 2013 a group of major banks came together with the Banking Environment Initiative and Consumer Goods Forum to form the Soft Commodities Compact, a joint pact to achieve net deforestation by 2020 through their financing of soft commodity supply chains. Unfortunately, there is still much more to do. While the banks in the compact are taking action, they only account for around half of global trade finance and it is taking longer than many hoped for sustainable strategies to filter through to mainstream finance.

To that end, the NGO Global Canopy has today unveiled a new platform to help educate financial institutions on their exposure to risk in the soft commodity supply chain, in a bid to accelerate firmer action against deforestation.

The Soft Commodity Risk Platform (SCRIPT) allows financial institutions to assess the strength of their lending and engagement policies in this area against a best practice benchmark score set by Global Canopy, compare their performance to other institutions in their peer group, and guide them on how to take action to tackle portfolio risks.

SCRIPT homepage

To do this, it plays host to two main tools. The first is the policy benchmarking tool, developed in partnership with WWF, which should give banks a fair idea of how they are performing against the rest of the industry and will suggest ways to strengthen their individual policies.

Meanwhile, a firmer hand from those at the top of financial chain could have a major impact on the behavior of supplier companies. So it's important not just for banks to set clear lending policies in this area, but also to use their financial muscle to lean on commodity suppliers to act, explained Tom Bregman, senior sustainable finance associate at NGO Global Canopy.

That's where the portfolio risk tool comes in, which will screen for the highest-risk companies across a bank or institutional investor's portfolio, using data from CDP and ZSL. It basically acts as a red flag to users, highlighting the first firms financiers need to engage with to derisk their soft commodities supply chain.

A screenshot of the SCRIPT policy benchmarking tool

With $1.4 trillion in investments, credit and underwritings in companies involved in the production and procurement of these soft commodities, banks have major skin in this game, and looming risks could become a thorn in their side, Bregman warned. "As environmental costs stack up and are linked with other issues such as climate change we are going to see greater regulatory, reputational and operational risks, which I think will begin to affect credit risk or market value if the companies are failing to transition," he explained.

Once identified, banks and investors can start to pressure companies to adopt firmer stances on deforestation. "What we need to see is the implementation of time-bound commitments," Bregman said. "Companies need to be encouraged to be more specific on when they are implementing their policies by, and when they are being asked to report against them. Financial institutions need to be engaged with companies from the very start of their relationship, and there needs to be ongoing monitoring and clear communication."

So while the rainforests of South America and the palm oil plantations of Indonesia may feel a long way away from the glass towers in Canary Wharf, banking giants are emerging a crucial player in driving the fight against deforestation. And armed with the right data, they could prove a powerful force for change.

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